Module 8 · Bond ETFs: Reading the Fact Sheet Advanced
A bond ETF is the easiest way to own hundreds of bonds with one purchase, but it does not behave like a single bond. This module teaches you to read a bond ETF’s fact sheet, explains why the yield in the headline is often the wrong one, and covers the newer kinds of fixed-income ETF.
Like a stock ETF, a bond ETF follows an index, a published list of bonds chosen by rules. A broad Canadian bond ETF typically tracks an index of the whole investment-grade Canadian bond market, such as the FTSE Canada Universe Bond Index, and can hold well over a thousand bonds.
Its fact sheet tells you what is in the basket. Look for:
Issuer split: how much is federal, provincial, municipal and corporate. A broad Canadian bond index is roughly a third federal, a third provincial and a quarter corporate, which is why it behaves mainly like a high-quality government fund.
Credit-rating split: how much is AAA, AA, A and BBB, and whether any is below investment grade (Module 4).
Maturity buckets: how much matures in 1 to 5 years, 5 to 10 years and over 10 years. More long bonds means a higher duration.
Average term to maturity and duration (Module 3).
Yield to maturity and the MER.
Illustrative numbers. Four figures tell you most of what you need: duration, yield to maturity, credit split and fee. The distribution yield, often shown most prominently, is the least useful on its own.
A fund that never matures
A single bond has a maturity date, and on that date you get your money back. A broad bond ETF does not. Its index has rules about which bonds belong in it, usually only bonds with more than a year left to maturity. When a bond gets too short, the fund sells it or lets it drop out, and buys newer, longer bonds to replace it.
The result is that the fund looks roughly the same year after year: similar average maturity, similar duration, a constantly refreshed set of bonds. That has two consequences:
There is no date when your money is guaranteed to come back. If rates rise and the fund falls 7%, there is no maturity date that pulls it back to where it was. What brings it back is the higher yield it now earns (Module 3).
Its duration stays about the same. A single bond’s duration shrinks as it gets closer to maturity. A fund’s does not, so a broad bond ETF carries about the same interest rate risk forever.
The practical upshotA bond ETF is ongoing ballast, not money for a specific date. For a known date, use a GIC, an individual bond, or a target-maturity ETF (see below).
Four yields on one fact sheet
Bond ETF fact sheets often show several yields, and they can tell different stories.
Yield
What it measures
Use it for
Distribution yield
Recent payouts to investors, annualized, divided by the price
Cash income only
Weighted average coupon
The average coupon rate of the bonds held
Not much on its own
Weighted average current yield
Coupons divided by today’s prices
Not much on its own
Weighted average yield to maturity
The return on the bonds held if each is held to maturity
Estimating total return
The distribution yield is often the biggest number on the page, and it can mislead in both directions, because it is driven by the coupons of bonds the fund bought in the past:
Premium bonds, after rates fall. A fund holding older bonds with high coupons pays out a lot of cash, say a 4.4% distribution yield. But those bonds trade above face value and will lose that premium by maturity. If the YTM is 3.5%, the fund will earn about 3.5%, not 4.4%.
Discount bonds, after rates rise. After 2022, many funds held low-coupon bonds bought when rates were low. Their distribution yields looked small, perhaps 2.5%, but their YTMs were around 4.5%, because the bonds will rise back to face value. They earned more than their payouts suggested.
The rule is the same as for single bonds in Module 2: use yield to maturity.
expected yearly return if rates stay put ≈ yield to maturity − MER
Example. A bond ETF has a weighted average YTM of 4.2% and an MER of 0.10%. If interest rates stay about where they are, you can expect roughly 4.2% − 0.10% = 4.1% a year. If rates move, the return will differ in the short run by about duration × the change in rates.
Kinds of fixed-income ETF
Type
What it holds
Good for
Broad (universe or aggregate)
All maturities, mostly government
Long-term ballast in a portfolio
Short-term
Bonds maturing in 1 to 5 years
Money needed in a few years; lower duration
Long-term
Bonds maturing in 10 years or more
Specialists only; very rate-sensitive
Corporate
Investment-grade company bonds
A little more yield, a little less cushion
Discount-bond
Bonds trading below face value
Taxable accounts: more of the return comes as a capital gain (Module 9)
Target-maturity
Bonds that all mature in one year, after which the fund closes and pays out
A known date, with ETF convenience
High-interest savings (HISA) and money market
Bank deposits, or treasury bills and very short debt
Parking cash; almost no price movement
Target-maturity ETFs behave much like a single bond or a ladder rung: the duration shrinks each year, and in the target year the fund winds up and returns the cash. They are useful for building a ladder inside a brokerage account.
HISA and money market ETFs are cash, not ballast. Their prices barely move, but neither do they rise when stocks crash and rates fall, the way a broad bond fund can. The yield they pay changes as soon as short-term rates change. They are investments, not deposits held in your own name, so do not assume CDIC protects your units the way it protects a GIC.
Leveraged and inverse bond ETFs are trading tools. Funds that aim for two or three times the daily move of long-term bonds, or the opposite of it, are rate bets that lose value over time through daily resetting. They do not belong in the safe part of a portfolio. The ETF Investing course covers these in Module 8: ETFs to Be Careful With.
Bonds inside your all-in-one ETF
If you own an all-in-one or asset-allocation ETF, such as a balanced 60/40 fund, you already own bonds. The fund holds one or more broad bond ETFs inside it, often a mix of Canadian, US and global bonds.
Before adding a separate bond fund, check what is already there:
Look at the all-in-one fund’s holdings and find its bond share. In a 60/40 fund it is about 40%.
Find the duration and YTM of the bond funds inside it, from their own fact sheets.
Ask what you are adding. If you add a broad Canadian bond fund to a 60/40 fund, you are mostly adding more of what you already own, and moving your overall mix toward bonds.
Sometimes that is exactly what you want, for example adding a short-term bond fund or GICs for money needed soon, while the all-in-one fund handles long-term growth. Just make it a deliberate choice. The ETF Investing course covers overlap in Module 5.
The bond-fund fact-sheet checkDuration: how far it can fall. Yield to maturity: what it should earn. Credit mix: who you are lending to. MER: what you pay. Ignore the distribution yield on its own.
Put it into practice
Your mission
Pick two bond ETFs: one broad Canadian bond fund and one short-term bond fund.
Open both in Compare, and find each fund’s fact sheet on the provider’s website.
For each, write down the duration, weighted average YTM, distribution yield, MER and credit split.
Estimate each fund’s expected yearly return (YTM − MER) and its estimated loss if rates rise by 1 point (duration × 1).
In your notes, decide which you would use for money needed in three years, and which as long-term ballast, and why.
Educational purposes only; not financial advice. Any bonds, funds, tickers, rates and figures are illustrative examples, not recommendations. Interest rates, deposit-insurance limits and tax rules change, so confirm current details with the issuer, CDIC and your tax authority. Worked examples are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.